Central Bank to Raise Insurer Investment Ceilings

The directive reduces liquidity level requirements of insurers

Yinager Dessie (PhD), governor of NBE.

The central bank is amending its directives to raise insurance company investment ceilings on acquisition and construction of buildings; and to ease the maximum liquidity level imposed by the central bank previously.

The new directive will enable insurance firms to invest up to 25pc of their total assets derived from their general insurance business on acquisition and construction of buildings, up from the current 10pc. It will also reduce the requirement to maintain 65pc liquidity of their total assets to 50pc.

The seven-page draft incorporates an article that enables insurance firms to invest 20pc of the assets resulting from the general insurance business in equity ownership of shares of different companies including the Ethiopia Reinsurance Company (EthioRe).

In addition, the directive allows insurance companies to invest 30pc of assets originating from their life insurance business in the acquisition and construction of buildings.

Currently, each insurance firm has up to 50 million Br invested in EthioRe, the two-year-old reinsurance company whose authorised capital reached 997.3 million last fiscal year.

Finalised as the first draft, the central bank sent the directive to the Ethiopian Insurance Association and insurance firms for comments and feedback.

“The Bank’s recent proactive and reactive response to the industry is appreciated,” says Tibebe Tesfaye, CEO of Global Insurance Company, which has invested in constructing its own headquarters, in a recovery yard and in a vehicle inspection centre. “We can now have more room to get income from investment rather than just operations.”

Five of the 17 insurance firms operating in the country – Nile, Nib, Nyala, Oromia and United – are in the process of constructing their headquarters for a total investment of 5.5 billion Br.

Nib Insurance was obliged to withdraw its investment from its joint head office construction with Nib Bank two years ago, as it can only invest 10pc of its assets on buildings.

“While it’s good to see the changes, the governing bank needs to ease the regulation further,” said Zufan Abebe, CEO of Nib Insurance Company.

In the previous directive, firms are obliged to reserve 65pc of their assets in liquid form, in cash or time deposits. The new directive reduced the amount to 50pc. Also, the firms used to invest up to 10pc of total assets in their choice of investment but now that figur has been reduced to five percent.

In addition, the insurance firms surrender some of their operating income toward reinsurance, thereby reducing their risks.

“As insurance firms have coverage to call for cash from their reinsurers if needed, the reserve on deposits need to be reduced further,” Zufan argues.

The draft directive also introduced an article on penalties for violating the investment thresholds. The central bank’s penalties include prohibiting the insurance companies from paying dividends or divestment.

Some of the insurance executives requested an extended implementation period of the directive.

“The directive should allow a compliance time for the firm to abide with the new amendments,” argues Tibebe.

The transitional provision deadline is open for discussions.

Others are concerned about the penalties set to be imposed on firms that violate the thresholds.

“The liquidity position changes from time to time,” argues Zufan. “The directive needs to set the conditions to identify the liquidation of firms and to notify them rather than imposing penalties.”

The governor of the central bank requested that the insurance firms critically scrutinise the directive.

“The challenge comes when we start implementing the directive,” Belay Tulu, insurance supervision directorate at the central bank, told Fortune. “Rather than focusing on the numbers, the firms need to see the directive critically and give us their comments.”

The central bank is also reviewing the corporate governance directive that would amend the board and corporate governance.

In recent months the bank has been relaxing some of its regulations including payment of dividends and asset classification and provisioning in the banking industry.

The 17 insurance firms operating in the country hold 5.5 billion Br together in capital and have increased their branches to 532, an 8.1pc increase from last year.